Since the start of 2022, markets have experienced severe volatility reducing the gains that investments had accrued from March 2020, the beginning of the Covid-19 pandemic, to December 2021.
Investors are facing two main challenges in 2022
The first of course being the geopolitical tensions between Ukraine and Russia, a very “visible” reason for a fall and a clear source of fear for the markets. It goes without saying that what is unfolding in Ukraine is a humanitarian disaster and our thoughts are with all those involved. At present, the evolution of the Russia/Ukraine conflict remains uncertain. At this stage the clearest economic impact on developed markets is via food and energy prices. Russia is a significant exporter of commodities, accounting for 13% of global crude oil production, 17% of natural gas production and nearly a tenth of global wheat supplies. Brent oil ended the month of February 2022 at $100 per barrel with this climbing to $128 per barrel on 8th March 2022 and subsequently falling to $108 per barrel as of 18th March 2022. European natural gas prices had also risen 15% in February. Higher energy prices could fuel higher or at least more persistent inflation, eating into household incomes.
This moves on to the second challenge in the markets, inflation.
We as consumers are all impacted by inflation, but with the levels that they’re at, it’s also causing a problem for markets. Central Banks are attempting to do what they can, but unfortunately the only tool they have in their locker is increasing interest rates. In a reaction to the increased energy costs, this week, the Federal Reserve in the US and the Bank of England have both increased interest rates from 0.50% to 0.75%. This will result in rising cost of debt for individuals on credit cards, loans and mortgages, but also for larger corporates which ultimately impacts profit margins.
Inflation figures have shown that in January 2022, CPI rose to 4.9% year-on-year. With a significant household energy bill increase coming in April, the inflation readings are likely to climb higher before they come down with the Bank of England warning inflation could rise above 7% this year with some experts fearing it could go higher. Rising commodity prices have helped the UK equity market (particularly the FTSE 100) this year, given the significant weighting of energy and mining stocks.
How does this impact investments
Equity and bond markets experienced a difficult month in February as concerns surrounding the Russian invasion of Ukraine took hold. For the month of February, global growth stocks were hit hard again, falling by 3.5%. Value outperformed growth but still fell by 1.6%. Developed market equities declined 2.5% leaving them down 7.6% for the year-to-date. The Global Aggregate bond index also fell 1.2%. Commodities gained over 6% with Brent oil and natural gas prices rising.
What we recommend
Essentially, as challenging as it is in a time like this, we recommend that our clients hold firm and retain their investment strategy as is. We ensure that all our clients are invested in a diverse range of assets which can help iron out the ups and downs stock markets experience in the short term.
In this time of uncertainty, I refer back to our article that we published on 13th March 2020, “Coronavirus and Stock Markets – Some Considerations For Our Clients”.
We asked…
- What are my timescales to realise capital? Income? Tax free cash?
- What cash reserves do I have to support me through such periods?
- How regularly have I been reviewing my portfolio?
We then said…
Our thought process currently is to sit tight. We appreciate it doesn’t sound as though it is the most pro-active but it guarantees two things:
- Your portfolios will not be relinquished at the very worst time.
- You will be fully invested in your portfolios at the very best time.
There has been no greater example of how this strategy works as the performance our clients’ portfolios have seen since March 2020 to January 2022.
Many people believe that the key to investing is identifying the perfect time to buy, and the perfect time to sell. The truth is that no one knows with certainty when markets will rise or fall. Trying to time the market is virtually impossible and when it happens, it’s more down to luck than anything. The best approach to take is using time to your advantage. The sooner you can invest and the longer you can invest, the more likely it is to achieve your financial goals, regardless of what happens in the short term.
Stuart, Jack and Lelan are available to discuss any queries that you may have and invite clients to get in touch.
